Bank says crude downturn could get worse than 1986 if OPEC keeps pumping more oil

The current downturn in the global oil industry may prove to be more severe than in 1986, when business endured the deepest slump in 45 years, as OPEC keeps markets oversupplied, according to Morgan Stanley.

Increased production from the Organization of Petroleum Exporting Countries is more than compensating for slowing growth in U.S. shale oil, the bank said in a report dated Tuesday. OPEC has boosted output by 1.5 million barrels a day since February, an amount roughly equal to a year’s increase in world demand, it said. Still, Morgan Stanley expects the industry to recover before the crisis reaches the extent of the 1980s.

“The entire current oversupply can be attributed to OPEC supply growth over the past four months,” analysts including Martijn Rats and Haythem Rashed said in the report. “On current trajectory, this downturn could be worse than 1986.”

Oil producers have cut $130 billion US in investment and 70,000 workers in response to lower prices, Morgan Stanley estimates. Crude has tumbled as OPEC maintains elevated output to pressure rival producers including shale drillers in North America. Brent crude futures traded near $56 a barrel in London on Wednesday, down 47 per cent from a year ago.

Recovery Possible

Industry executives have expressed similar concerns. Oil prices will stay “lower for longer,” BP PLC chief executive Bob Dudley said in St. Petersburg on June 19.

Still, Morgan Stanley said while oil futures contracts over the next 25 months suggest a more severe slump than that witnessed in 1986, the bank does not expect that this will be the case. There will be a “slow but gradual” recovery in crude as low prices curb investment in supplies and stimulate demand, according to the bank. It may take until the second half of next year for global markets to rebalance, it said.

The price outlook is more positive now than in the 1980s because there’s less spare production capacity available, Morgan Stanley said. Spare capacity is equal to about two to three per cent of total supply, compared with as much as 30 per cent in 1986.

Oil majors have “always recovered” from crises during the past few decades, the bank said. “Forecasting that they will not be able to rebalance costs with prices would be a bet against history.”